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This question is relevant for Australia but I would think that it would apply to other countries too.

I've noticed that nearly all residential investment properties are owned by non professional investors. What I mean by that is that the landlord is generally someone who owns maybe just that one property (or maybe only a couple of properties) and whose primary occupation is not a professional investor but who actually has some real job where they make most of their income.

Given that the housing market has been in boom for possibly the last 25 years, why aren't there investment companies whose sole business model it is to buy and invest in residential properties?

You have building companies that build houses, you have real estate companies that sell houses, you have property management companies that manage rentals but nearly all residential properties are owned by individuals or small groups of people.

This contrasts greatly with other vehicles of investment such as stocks where most are owned by corporations, banks or large investment groups. Even other classes of properties such as commercial real estate are generally owned by professional entities.

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    I suspect for similar reasons to why so many individual restaurants exist rather than having been totally out-competed by chains: it's a business with non-uniform product that benefits from local knowledge, customer relations and benefits from "sweat equity". And individuals can get favourable capital gains tax treatment by (ab)using their "primary residence" exemptions. – pjc50 Feb 8 '17 at 16:53
  • Interesting. I imagine this varies a lot by location. In the area where I live a large proportion of big residential buildings (i.e., apartment complexes) seem to be owned by real estate investment companies. – BrenBarn Feb 8 '17 at 17:29
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    Given that the housing market has been in boom for possibly the last 25 years Did you miss that big housing crisis in '08? Yes the biggest hit was in America, but the effects were global. – David Grinberg Feb 8 '17 at 17:49
  • @DavidGrinberg - effects were global but probably because of Australia's proximity to China, we were largely sheltered from it. There might have been some short term declines but not much effect here to dampen our high prices. – Joe.E Feb 9 '17 at 0:33
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    @DavidGrinberg The subprime mortgage crisis resulted housing prices falling in the US, but not most of the rest of the world because they didn't have those subprime mortgages or the housing bubble those mortgages helped create. It only caused housing prices to drop in other countries that had their own home grown housing bubble that was popped by the knock on effects of the US crisis. Outside of the US the main impact of the crisis was to cause the almost world-wide "Great Recession" and the European banking crisis that led to the European sovereign debt crisis. – Ross Ridge Feb 9 '17 at 4:26
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Because the returns are not good.

One of the big drivers in Australia is "negative gearing": if your investment loses money you can offset losses against your tax on other income. Institutional investors and corporations are in the business of making money: not losing it. Housing market investors are betting that these year to year revenue losses will ultimately be made up in a big capital gain: for which individuals get a huge tax break that is also not available to corporations.

Capital gains are not guaranteed. Australia has benefited from 25+ years of economic, employment and wages growth: a result of good government planning, strong corporate governance and a fair slice of luck. If this were to end housing prices would plateau at best and crash at worst. A person who has negative cash flow investments has to sell them urgently if they lose their job. A glut of mortgagee sales and property prices could easily come off 20-30%.

Rental yields on residential property in Sydney are about 4% with a capital gain of currently 10% but this has been flat or negative within the last 5 years and no doubt will be again within the next 5. Rental yields for residential property are constrained by mortgage rates: if it significantly cheaper to buy then to rent, why would anyone rent?

In contrast, industrial and commercial property gets a yield of about 7% and gets exactly the same capital gain. This is because land is land and if the price of industrial land doesn't grow at the same rate as the residential land next door eventually one will be converted into the other. Retail rentals are even higher. In addition commercial tenants are responsible for more outgoings and have fewer legal rights than residential tenants.

Further, individual residential properties are horribly illiquid and have large transaction costs. While it is possible to bundle them up into property trusts so that units can be sold on the stock exchange it is far more common to do this with office and retail buildings. This is what companies like Westfield and AMP Capital do. Notwithstanding, heavily geared property trusts can get into deep water because of the illiquid nature of property as the failure of Centro illustrates.

That said, there are plenty of companies that develop residential houses and units for sale to owner occupiers or investors because that's where the money is.

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    Note that this answer is fairly specific to Australia (where negative gearing is still a thing)... – Jared Smith Feb 8 '17 at 16:44
  • @Dale - Isn't negative gearing just being able to claim your interest payments as expenses though? If so, then businesses should have the same tax advantages as long as they fund the purchase with debt (eg. if a business gets a business loan, the interest on that should be tax deductible) – Joe.E Feb 9 '17 at 0:36
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    @Joe.E Yes, but as I said, businesses are generally not in business to lose money. Negative gearing = losing money. They do not have access to the massive CGT concessions at the end like individuals do. Also, why would a business invest in an asset with a yield of 4% when they can invest in their business (whatever it is) which should have a yield of 20%+. – Dale M Feb 9 '17 at 0:47
  • @DaleM - fair enough – Joe.E Feb 9 '17 at 2:20
  • Speak for yourself, I am getting great returns from my residential property investments, rental returns currently 8%+ and capital gains 230%+ in just over 8 years. – Victor Feb 9 '17 at 9:19
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Your experience is anecdotal (outside Australia things are different). There are many companies and real estate investment trusts (REITs) that own residential properties (as well as commercial in many cases to have a balanced portfolio). They are probably more common in higher-density housing like condos, apartment buildings, flats, or whatever you like to call them, but they are certainly part of the market for single family units in the suburbs as well.

What follows is all my own opinion. I have managed and rented a couple of properties that I had lived in but wasn't ready to sell yet when I moved out. In most cases, I wish I would have sold sooner, rather than renting them out. I think that there are easier/less risky ways to get a good return on your money. Sometimes the market isn't robust enough to quickly sell when it's time to move, and some people like the flexibility of having a property that a child could occupy instead of moving back in at home. I understand those points of view even if I disagree with them.

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    There are also a lot of US property owners who buy and manage properties with an eye to creating passive* income which will eventually surpass their cost of living, at which point, the day job becomes optional. (FI/RE using real estate). However, in my mind, they cross the line into professional when it becomes their primary source of income. (Some states may require property management license at this point as well.) – Xalorous Feb 8 '17 at 20:38
  • @Xalorous There are also lots of investors in the US that attempt to do the same thing by purchasing dividend stocks. In Australia residential property investors have advantageous tax treatment. For those in the US, it's probably more because they think they understand the risks of real estate investment, but they know they don't understand the risks with equities. My point was simply that there are plenty of institutional investors in residential properties. – Nathan L Feb 8 '17 at 20:44
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Economy of scale on one side versus "person monetizing an illliquid asset" on the other. Most multifamily rental buildings are owned by professional real estate investors (as well as individuals growing an empire to become a professional real estate investor whom I will count in this group). The rental difference between a 2000 Sq foot two bedroom apartment and 2000 Sq foot two bedroom standalone house is not large. The construction cost per square foot for a standalone house is higher than for a multifamily building (of similar height and materials). Maintenance calls, landscaping, and new roofs, dealing with permits and inspections, etc are much more efficient with multifamily properties. On the supply side, most single family rentals tend to be the nonprofessional single property owner because they happen to already own the place, and for one reason or another a. Don't want to sell and b. Want to gain cash flow on the asset.

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As other answers have pointed out, professional real estate investors do own residential investment properties. However, small residential units typically are not owned by professional real estate investors as your experience confirms. This has a fairly natural cause. The size of the investment opportunity is insufficient to warrant the proper research/due diligence to which a large investment firm would have to commit if it wanted to properly assess the potential of a property. For a small real estate fund managing, say, $50 MM, it would take 100 properties at a $500K valuation in order to fully invest the funds. This number grows quickly as we decrease the average valuation to reflect even smaller individual units.

Analogously, it is unlikely that you will find large institutional investors buying stocks with market caps of $20 MM. They simply cannot invest a large enough portion of total AUM to make the diligence make economic sense.

As such, institutional real estate money tends to find its way into large multi-family units that provide a more convenient purchase size for a fund.

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    There is a difference between fund managers and an individual professional property investors - and individual professional property investors do buy individual residential properties. – Victor Feb 9 '17 at 22:57
  • I think that's a good clarification. I have come across quite a few individual professional property investors. – cmanbst Apr 23 '18 at 14:25
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None of the previous answers calls out an important factor to residential property ownership bias towards individual investors. The amount of time spent managing (leasing, maintenance and rent collection) on single properties is much higher, per property, than larger investments. But what is mentioned in passing is the bias towards smaller investments. Fewer individuals have the capital to purchase and engage in the leasing of multi-tenant properties, but they are more likely to have the funds for smaller investments. So the smaller investor can both afford the entry costs, and the time investment, while the larger corporate entities benefit from the opposite proposition.

protected by Dheer Apr 8 '17 at 11:21

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